The Role of the iPad for Apple’s Growth

Analyzing the pricing strategy of the iPhone 5c has led me down some interesting trails of thought. Brian wrote yesterday that Apple simply doesn’t have the DNA to go down market.

I disagree with Brian here. I believe Apple has shown that they can make products for everyone with how they built out the iPod line. I simply don’t think the iPod lines downstream philosophy applies to the iPhone. I do, however, believe it applies to the iPad–at least to a degree.1

In my opinion, with where the market is right now, I believe it is more important for Apple to be aggressive (not cheap) with the iPad.2

Stating My Case The argument many are making about Apple’s need to be more aggressive about the price of the iPhone is to acquire customers at the $400 price range. The counter argument to this is to question the value of a customer in that price range to the ecosystem. The theory I would posit is that the customer of a lower price iPad is more valuable to the ecosystem then the customer of a lower price iPhone–at least right now.

I started thinking about this when I started digging through the results of our consumer research panel on late adopters. Specifically I intended to understand the intent to buy smartphones from those who had feature phones. What I found was interesting. The majority of those who still had feature phones were adamant that they did not need a smartphone. Many stated with confidence that all they do is make phone calls and many of the smartphone features were not of interest to them. What’s more is that 60% of these non-smartphone owners were interested in tablets.

I bring this up to make a point. I’d argue that there are large sections of the market who are not fully reaping the benefits of their smartphones. Perhaps even less so than we originally thought. Even if this segment was to get smartphones they would probably not contribute much to the ecosystem by way of apps, services, etc, at least not yet. Perhaps it’s possible that for a segment of the market even smartphones over serve their needs.

However, we know that tablets, and the iPad in particular is not the kind of product you buy to use for its basic features. People who buy these products are doing so for a vast majority of more computing centric reasons and many that infringe on the value of the traditional PC.

What if they can’t Afford Both? While debating with myself on this topic, I brought up the point that what if the customer in this price range can’t buy both? This is a good point. But if the iPad was to be more aggressive in price, say less than $300 or even $250, perhaps said customer would opt for an even lower cost phone in order to save money to get an iPad.

I’m not insinuating this logic would represent the totality of this part of the market. I’m mostly just thinking out-loud. But I do think the competitive landscape not just on tablets but also more mid-range phones could face some interesting new dynamics if the cost of the iPad was to get even more aggressive. I also wonder the effect this would have on big phones in the few regions of the world where they are selling somewhat well.

The iPad may be the product that most closely emulates the halo strategy and gateway product to the Apple ecosystem that was the iPod. The time to be aggressive with the iPad is near. Apple has much less legitimate competition in this space and lowering the price would further exploit the vulnerability of the PC and potentially hurt Microsoft even more. The iPad is also the right product to lead Apple’s invasion strategy to China.

Tablets are an area of extreme growth despite what people may say about it slowing. Here is my firms chart showing what is happening in the overall PC space. Yes we count PCs as tablets because our research indicates that is exactly how consumers view them–as computers.

Food for thought.

there is a difference between the iPod and the iPad. One is a computer the other is not. [↩]

The tablet segment in many regions is growing faster than the smartphone segment [↩]

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

I think that Apple is willing to go down market with the iPhone. After all, their margins on it are absolutely huge. They can sell a very profitable device that is very good, for much less. Either next year, or the year after, they will go down market with it. They haven’t this year because there is still room for expansion in the subsidized world in China and Japan. The timing isn’t right yet.

benbajarin

I agree the timing isn’t right. But the timing is right for the iPad. And if they did that it would pave the way to compliment the timing of the iPhone.

Bill Smith

Wide first, then deep. Sounds reasonable, but I don’t think that’s their play.

The iPhone sells into a ‘point of entry’ market. It buys you into the Apple ecosystem. If you’re going to have one and only one device, it’s a smartphone, not a tablet. While I agree with Christensen and Deidu regarding products being hired to perform a job, Apple is doing a classic supply/demand balance. They can only make so many iPhones. The logistics of shipping 40-50 million of a highly complicated device is such that they must nurse their suppliers along, funding their equipment purchases just to keep part pricing in line.

Apple sees that there’s a limit to how many devices they can produce without throwing their supply-side ecosystem out of balance. Then’ they’re setting the price based on “peak iPhone”. They can’t produce 3x as many phones, and at 2x as many, their part supply becomes unreliable. iPhones are constrained by how many they can MAKE, not how many they can sell. This is why they’ve optimized for phones that can be produced more easily rather than just going cheap. Otherwise, there would be an iPhone nano or capitulation on screen size.

iPad is a demand-side ecosystem play. They’re nowhere near “peak iPad”, and must push value. iPad is constrained by how many they can SELL. They want iPad sales to be in the same ballpark as that of the iPhone. The smaller device (Mini) is because they’re optimizing for maximum efficiency in the supply chain.

Even with the Apple TV. It’s a “hobby” for Apple until they can get unit volume high enough to best capitalize on their supply chain. That’s why I’m betting against a full-fledged television unit. How do you sell 40 million of them?

Rene Stein

If Apple sticks with a marginal iPhone growth strategy, then it is easy to understand why the stock market currently values Apple the way they do. The lower margin iPad just won’t move the needle on revenue enough to create the same kind of growth the iPhone did.

Hosni

Ben, I agree with your sentiments, but I believe Apple’s recently announced strategy with iPhone reveals how it plans to address the lower end of the iPad market. Apple can offer legacy-model iPads and iPad Minis (both newly produced and reconditioned) in the $250-$299 range, while selling the latest version of the Mini for $329+ and the iPad for $499+.

Taking this approach allows Apple to reach the “bottom” end of the market without spending anything on new product development, and by taking trade-ins Apple both increases the likelihood of new device sales at premium prices and earns a profit by selling reconditioned devices. Win-win-win for Apple.

benbajarin

Of course that is factored into what I was thinking. But how much they knock of the price of the mini or last years tech is the key point. Should that be the approach they take then it should be aggressive.

Second, the counter point to this is that you can’t market last years tech. This is why the 5c is so smart. Rather than lower the price of the 5 to $549 they used a process that will get them better margins at that price point and they can market it as a new phone. Which is exactly how the masses will see it.

I can see Apple doing something similar with the iPad to be aggressive and more deeply penetrate the iPad into the market.

Bill Smith

Or, they may explore premium iPad models (larger, somehow more capable, greater storage capacity). They need to find the edge of the supply/demand curve.

DarwinPhish

Most iPhones are sold to carriers, who then resell to consumers as part of a service. As Horace Dediu often says, the job the iPhone is hired to do is to sell cellular services. That Apple is not offering an iPhone for less than $450 (or a new model for less than $550) suggests that their primary customers are not demanding a lower priced iPhone because such a phone will not help them sell much more services.

Apple’s ecosystem answer to a cheaper iPhone is the iPod Touch. It, like the iPad, is sold directly to consumers, which is why Apple has to price these devices more aggressively.

benbajarin

Yes, completely agree on the different jobs to be done. I actually edited out a very long part of this article where I dove into just that.

The reason they can do this with iPad first, and should IMO, is to avoid channel conflict. Horace pointed out in a thread on twitter I had with him yesterday that had they gone too far downstream they would have created channel conflict in subsidized markets. This is certainly true and the only way to avoid this right now would have been to offer lower cost phone only to unsubsidized markets. Something Apple wouldn’t do.

There are no channel conflicts being aggressive with iPad. This is also why the product line is closer to iPod as a segmentation strategy.

Soso

I vaguely remember an interview that TC gave earlier this year, maybe at AllthingsD, where he suggested that Apple would approach the iPhone product umbrella in a unique way. I initially thought Apple would eventually solve this “problem” in a creative way using some combination of iWatch + peripherals, but what if instead they simply add 3G capabilities to the iPod Touch?

There’s been healthy discussion regarding the benefits of a feature phone + 3G capable iPad/iPad Mini combination, so why not a 3G iPod Touch (16GB for $229+$130 = $359)? With Facetime audio, iMessage and other third party apps a 3G iPod Touch could easily replace many of the normal non-phone functions of the iPhone. There is the obvious limitation of Apple-to-Apple device communication for native apps, but for $359 users would consciously decide that the tradeoffs, and third party app workarounds, are worth it. I wouldn’t personally choose that solution, but others on a budget might. Just thinking out loud…

FWIW my parents have an iPad and think there is no need for an iPhone or any other smartphone.

peter

Same here

Bill Smith

Do you parents carry an iPad with them throughout the day and make/receive phone calls on it? No? Which device do they use for their phone calls? Which device(s) do they carry with them for communications purposes? Do they spend a great deal of time at home and not ‘mobile’?

Their iPad never leaves the house, near as I can tell. I forced a Blackberry on them. Most of the time, they do not take it with them (in the car, to the store, etc.)

Rene Stein

I have an iPad Mini with cellular connectivity. I don’t need a phone. It’s WAY better than in iPhone for almost anything else, and almost perfect for a game machine. Fits in my man purse nicely too. Phone and SMS is so last century.

peter

I think you are spot on with your analysis.

While the iPhone might be an excellent sales person for data plans, many consumers (including my family) do not wish to be burdened by high monthly fixed costs (call me a miser). For those consumers the iPad is the entry device (we have three at home) because it takes care of their mobile computing needs in a very cost efficient manner. Think of it; a 4G/LTE iPad mini ($429 on prepay, cellular normally switched off) and a $100 phone (on prepay) make for a very cost efficient package.

Bill Smith

Three iPad’s…AT HOME…do not compete against what an iPhone is used for…generally AWAY FROM HOME. iPad and iPhone serve two very different purposes.

pxlated

A 4G enabled iPad works as well as an iPhone away from home. In fact, I’d say better since they have a large useful screen.

Bill Smith

For phone calls?

pxlated

For everything but. – If they’d add calling to the iPad I’d never carry a phone again, I’d use an earbud or headset with the iPad.

peter

Like tea and coffee, the iPad and iPhone are not perfect substitutes, but many people will happily take the one if the other is not available.

pxlated

Half the people I know that have iPhones use them like basic dumb phones and the people I know that haven’t bought a smartphone want the style and apps a smartphone offers but don’t want a data plan. Half these people have iPads. Personally, I would love to have a stripped-down (no data) iPhone as I use my cell-enabled iPad for most everything but basic phone calls. Alternatively I’d take an iPad with phone capabilities as long as there were accessories (earbuds or whatever) so I didn’t have to hold the thing to my ear.

You are looking in the correct place for a cheaper phone from Apple. It’s called the iPad Mini and it uses FaceTime Audio. They already have half a billion subscribers and they Think Different.

bradpdx

I always get a little chuckle when my 80-year-old mother refers to her iPad as “my computer”, but for her, that is exactly what it is. It is mobile only insofar as she moves it around the house and it doesn’t need cables.

It is the first computer she has actually been able to use effectively, and boy, does she use it.

Anders CT

The new APIS added to iOS7 strongly suggests that there will be iOS7 notebooks in the future. It seems Android is heading this way also, with Intel adding 64-bit support.

But I agree with the basic premise: The PC is far from dead. It is the traditional windows desktop that is dead.